Lecture 5: International trade part 2: The GATT and the WTO
Completing the history of trade regulation
I want to bring the discussion of the history of trade regulation to the present, focusing on
the Uruguay and Doha negotiation rounds of the GATT. In the course of doing this I’ll discuss
the WTO, what it is, where it came from, and what it’s been up to.
As you probably know, the WTO has been the subject of some controversy. The
amazing thing about this controversy, to me at least, is that it arouses strong passions in
conditions of more or less total ignorance, by which I mean that probably not one out of 100
people, when asked what the WTO is, where it came from or what it does, could give you a
straight answer. There will be moral posturing about oppression and so on, but the simple, basic
questions, what it is and what it does, would be unanswered. But by lunchtime you’ll know these
Tariffs and subsidies.
The central issue in the Uruguay round of talks was agricultural
tariffs and subsidies, so I want to spend a few minutes on the similarities and differences between
tariffs and subsidies.
Let me briefly review tariffs. A tariff is a tax on imports. If French widgets cost $22 and
Polish widgets cost $ 15, then under conditions of free trade the Polish widgets will undersell the
French widgets in the French market. The French government enacts a tariff on imported
widgets of $ 10 per, so that Polish widgets now cost $ 25 in the French domestic market. The
French consumer, who could get widgets for $15 before the tariff was enacted, now must pay $
22. So the French consumer is worse off, and the French producer is better off. There’s a
transfer of wealth from the French consumer to the French producer.
These effects all occur inside France. Internationally, Polish widgets are still
underselling the French product. In fact, with a more or less guaranteed market inside France,
there’s little or no incentive for the French producer to get more efficient at producing widgets,
so if anything the Polish control of the widget market in the rest of the world is reaffirmed. The
French producers don’t have an export trade in widgets, since they’re being undersold so badly
by the Poles in the international market, so they manufacture enough for the French domestic
market and no more. This means that the French producers never get bigger than the size of the
French domestic market permits, so that they never achieve the economies of scale we were